Page 297 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes Non-monetary costs:
(a) The factor firm doing the evaluation of the creditworthiness of the customer will be
primarily concerned with the minimization of risk of delays and defaults. In the
process, it may tend to ignore possible sale prospect.
(b) A factor is a third party to the customer and the latter not feel comfortable while
dealing with it.
(c) The factoring of receivables may be considered as a symptom of financial weakness.
Thus, while evaluation the use of factoring services, the firm must analyze the costs
and benefits associated with the factoring. It may be noted that though factoring is
a costly service, yet some firms may find it to be more economical than to establish
their own collection department.

Self Assessment

Fill in the blanks:
9. Factoring is a collection and finance service designed to improve the cash flow position of
the sellers by converting ………………… into ready cash.
10. The ………………… is a substitute for in-house management of receivables.
11. The advance finance provided by the factor firm would be available at a …………………
interest costs than the usual rate of interest.
12. The factoring of receivables may be considered as a symptom of financial ……………… .

13.4 Managing International Credit

Credit management is difficult task for managers of purely domestic companies, and these
tasks, become much more complex for companies that operate internationally. This is partly
because international operations typically expose a firm to exchange rate risk. It is also due to
the perils involved in shipping goods to long distance and to cross at least two international
boundaries.

Exports of finished goods are usually priced in the currency of the importers’ local market.
Therefore, a US company that sells a product in Japan, would have to price that product in
Japanese yen and extend credit to Japanese wholesale in local currency (yen). If yen depreciates
against the dollar before the US exporter collects its account receivable, the US company
experience an exchange rate loss, the yen collected are worth fewer dollars than expected at the
time when the sale was made. The exchange rate variation can happen the other way yielding an
exchange rate gain to the US exporter.
For a major currency such as the Japanese Yen, the exporter can bridge against this risk by using
currency, forward or option markets, but it is costly to do, particularly for relatively small
amounts.
This risk may be further magnified because credit standards may be different and acceptable
collection techniques much different.

Notes The exporter cannot take the “not to bother” approach and concede foreign markets
to international rivals. Those export sales, if carefully monitored and (where possible)
effectively hedged against exchange rate risk, often prove to be very profitable.

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